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When, Why, and Why Not, Should You Consider Bankruptcy?
The idea of declaring bankruptcy, wiping out certain debts or repaying them over time with court protection-no more hassles or nasty phone calls from menacing creditors–and then moving on more or less debt free has undeniable appeal to anyone faced with overwhelming debt.
But be careful. Compelling as it may sound, bankruptcy has a lingering and far-reaching impact that touches every aspect of life. Bankruptcy ruins credit, makes it difficult, if not impossible, to keep bank accounts and credit cards, can take some valued, and valuable, possessions, and makes it difficult to get on with necessities of life such as buying or renting a home or car, getting insurance and finding a job.
In fact, most financial advisors look at bankruptcy as a desperate last resort, when budgeting, credit counseling and other efforts to get out of debt have failed, and then only with the advice and guidance of an experienced bankruptcy attorney.
There are two basic types of personal bankruptcy, Chapter 13. Each must be filed in federal bankruptcy court, but certain conditions must be met before filing for bankruptcy under either chapter. The moment you file a bankruptcy case, an immediate automatic restraining order kicks in and gives you protection from the relentless creditor.
You must get credit counseling at your own expense from a government-approved organization (list available at http://www.usdoj.gov/ust/eo/bapcpa/ccde/de_approved.htm) within six months before you file and you must satisfy a “means test” to confirm that your income does not exceed a specified amount. That amount differs by state (also available at http://www.usdoj.gov/ust/eo/bapcpa/meanstesting.htm).
The world of bankruptcy under the Code was overhauled drastically in late 2005 to encourage people with a steady income to use Chapter 13 instead of Chapter 7. Chapter 13 allows those with a steady income to keep certain property, like a home with a mortgage or a car that might be lost during the bankruptcy process. Under Chapter 13, the court approves a repayment plan where you give up part of your future anticipated income to pay some or all of what you owe, rather than surrendering property. In return, certain debts must be repaid. These include overdue school loans, child support, taxes, car loans, and home mortgage payments and, in some cases, all of your debts.
Chapter 7 allows you to “discharge,” in effect to erase almost all of your debts. A trustee is appointed to collect non-exempt property, sell it, and dole out the proceeds to your creditors. This is not an absolute solution: certain debts, among them past due child and spousal support, may not be excused; you risk losing your property; and, if you had transferred property to avoid the loss, some transfers can be undone. Unlike Chapter 13, there is no filing of a repayment plan with the court
Chapter 7 and Chapter 13 filings are administered by someone known as a trustee. The bankruptcy trustee, appointed by the US Department of Justice, investigates the financial affairs of each debtor, can sell non-exempt assets, and convenes a “meeting of creditors” about a month after a case is filed. Each bankruptcy case is assigned a judge who makes rulings if called upon. Lawyers are not required, but you may want an seasoned bankruptcy lawyer to advise you about when to file and to guide you through the complex, heavy-paperwork process.
Chapter 7 usually takes about three months to complete but the case stays on your credit report for 10 years. Chapter 13 lasts from three to five years, depending on your circumstances, and remains on your credit record for seven years. Before discharge of the case under either chapter, you must receive certification for a completed course in financial management from an approved counseling agency.
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